Here Is Why the Biggest Revenue Source for Macy's Is Real Estate

On Thursday morning, a brighter-than-expected outlook for department store chain Macy's (M) sent shares in the company briefly skyward.

However, once reality set in, the stock began to correct itself.

And that reality is that the long-held model of the major national department store is becoming unsustainable.

Macy's said its third-quarter sales in stores that have been open longer than a year dropped by 2.7%, which is better than last year's the 3.9% a year earlier, as well as better than the 2.8% drop that Wall Street had expected.

Profit came in at $17 million, a dismal decrease from the $118 million a year earlier. Revenue fell 4.2% to $5.63 billion.

Earnings per share clocked in at 17 cents, a big miss from analysts' expectations of 41 cents a share, and an even larger drop from 56 cents a share a year earlier.

Comparable sales, excluding licensed departments, fell by 3.3%, worse than the 2.8% drop Wall Street had expected.

However, Macy's has upped its forecast for full-year comparable sales on licensed and owned items, now expecting a decrease between 2.5% and 3%, rather than the 3% to 4% decline the retailer had previously expected. And the company now expects annual diluted earnings per share to fall in a range of $3.15 to $3.40.

But brick-and-mortar retail is clearly hurting, with no end to the pain in sight. Consumers are simply finding it too convenient to shop online with Amazon or other etailers, rather than getting in the car and driving to the mall.

Amazon is even on pace to eclipse Macy's when it comes to apparel sales next year. A few years ago, that sort of move would have been unheard-of, as apparel was considered the one retail space safe from online shopping threats.

During the first nine months this year, sales across all U.S. department stores fell by 4.8%, while retail itself, including ecommerce companies, increased by 2.9%. The money, and more of it, is certainly being spent, but online, instead of in stores.

In an effort to battle this trend, Macy's realizes that it needs to consolidate itself. Gone are the days when the chain could afford to have a store in every neighborhood mall.

In August, the company said that it would close 100 locations. And in October, the company sold five stores to real estate investment trust General Growth Properties.

On Thursday, Macy's said that it is selling more of its properties, including its men's flagship store in San Francisco. And it is looking for buyers for more of its properties across in major cities across the country.

Macy's also said that it has entered into a joint venture with asset management company Brookfield Asset Management to redevelop as many as 50 of its stores.

These real estate deals will net the company millions, helping to make up for its loss in sales.

However, this is clearly unsustainable for a healthy business over the long term. And the way American shopping trends are headed, it looks likely that department store retailers are going to become an outdated novelty sooner rather than later.

Across the industry, retail stocks have been popping, mostly on better-than-expected earnings or moves such as Macy's is making to keep their businesses rolling. It may be tempting to edge back into Macy's, as well as J.C. Penney, Kohl's or Nordstrom.

However, the truth of the matter is that brick-and-mortar retail remains deeply flawed and troubled. Continue to steer clear of these stocks.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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